Why Hold Any Auto Stocks (Near-Term) Beside Tesla?

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Includes: F, GM, GPC, SPY, TSLA
by: Peter F. Way, CFA
Summary

If your investment mission is wealth building or spendable capital gain, you shouldn’t.

Have any of the others been beaten down enough to offer a near-term recovery gain?

And is TSLA itself competitive with the best wealth-building candidates? It’s not on our ten most promising Market-Maker [MM] Intelligence List of current buy candidates.

Even so, it probably has more gain traction than many in your portfolio at this point.

Why read this report?

This is an analysis of how the prices of specific securities are likely to change in the next 3-4 months, based on the way major investment organizations ("institutional investors") have perceived those prospects and made multi-million-dollar trade changes of holdings in their multi-billion-dollar portfolios. It is not a study of years-plus effects of economics, technology, politics, or competitive use of resources on earnings per share of securities. Such studies by others are embedded in their forecasts.

It is a comparison of present-day opportunities for capital gain among many related alternative choices for wealth accumulation as seen by investors with the capital and human resources sufficient to cause such price changes. It is based on how their prior internal organization forecasts, comparable to today's, worked out in the securities markets in time horizons of subsequent shorter-term holding periods.

During the year 2018, daily analysis like this on live selections (before the fact) of over 4,800 top-ranked choices produced net gains (in equities) after losses, at average annual rates of +25%, in a year when the market index of the S&P 500 declined by -7%.

Auto Industry Investments – Now a Tactical Mistake?

Figure 1 pictures how the Market-Making [MM] community currently sees the coming price prospects held by its institutional investment clients for auto stocks – as revealed in the way the MMs protect themselves when called upon to put firm capital at risk while providing buyer~seller balance to complete multi-million-dollar block trades in these stocks.

Figure 1

(Note: all materials from blockdesk.com have been approved for this article)

For comparison, the MM-expected price range for SPDR S&P500 ETF (SPY) appears as the location [23] just to the left of [19] for Genuine Parts (GPC). That suggests all of these stocks are a less attractive near-term bet on a reward-to-risk basis than the “market” at large.

Beside the quantitative Reward~Risk comparisons, there are qualitative considerations to risk and reward. The odds of their being achieved or incurred and the lengths of time which may be involved are the qualitative dimension needed in suitable portfolio investment selections. Those aspects are examined in Figure 2 for the principal auto manufacturers.

My apologies for the sea of data, but this is an industry with a half-trillion dollars of Market Capitalization and just over half of it is in three stocks. Over two dozen others are merely industry-derived activity. In a seriously disrupted (and scared) industry, that is not an enviable place for an investor to frequent with risk capital.

Figure 2

Source: blockdesk.com

Needed perspective comes from columns [S] and [T], showing the market capitalizations of the stocks, and the number of Seeking Alpha readers and contributors indicating a desire to be informed when the stock is referred to in an article or news item.

Market caps are dominated by Toyota (TM), with equal-sized General Motors (GM) and Tesla (TSLA) making up over half of the column’s half-Trillion-dollar total. Fourth- and fifth-wheels of Ford (F) and Fiat-Chrysler add another $60 billion of attention in the primary vehicle manufacturing camp. Among them all, only TSLA shows a prospect of coming profitability from the expectations of the market-making community.

That harsh assessment comes from the analysis of actual market OUTCOMES of MM forecasts made live in the past 5 years, forecasts with upside to downside price expectations balances like those of the present. If coming market price behavior of these stocks resembles what has preceded them, it is mostly an inhospitable place for risk capital to reside.

The details of Figure 2 are as follows: Current-day price range forecasts implied by the hedging actions of MMs putting firm capital at risk to satisfy institutional investor client block trades are seen in [B] and [C]. An upside price change potential of [B] from [D] is in [E], and a measure of the proportions of up to down price change prospects is the Range Index in[G]. Previous examples of similar [G] forecasts are counted in [L], with their net price gain performances indicated in [ I ]. The proportions of profitable outcomes [H] are a highly significant element of this analysis.

They can be used to weight the achieved upside reward portion of prior similar forecasts, and its complement used to weight the price drawdowns actually experienced in the process. Win odds of 75 out of 100 positions are marginal, with 80 and higher desirable. The effect of such weighting of [ I ] and [F] data in [O] and [P] are netted in [Q]. The rows of Figure 2 are ranked, largest to smallest on [Q].

Significantly, only the top 3 stocks, including TSLA have any significant odds-weighted profitability. When the average holding periods of the prior [L] positions is imposed on [Q], the RATES of return to be expected (in basis points per day) further separate the potential outcomes. Only TSLA has any significant payoff promise for investors attempting to build equity investment portfolio wealth.

Additional perspective on this kind of evaluation comes with the comparison of TSLA expectations with those of market-index ETF prospects, such as in SPDR S&P500 Index ETF (SPY) and with the best-ranked issues in a population of over 2800 widely-held and actively-held stocks and ETFs. They are shown in the blue rows at the bottom of Figure 2.

The Win Odds of SPY at 69 are under those of TSLA (75) while the Reward and Risk elements are also smaller. TSLA has more volatility than the present market – no kidding! But only the downside of volatility is Risk to the wealth-builder; the upside is opportunity.

SPY’s [F] of -4.2% is actually larger than its achieved +1.5% rewards [ I ] from prior similar forecasts. Even with a 70 / 30 odds split in favor of the +1.5%, the net [Q] for SPY comes up a negative -0.3%. TSLA’s trade-offs between 75% of its +10.2% achieved gains and 25% of its exposed -12% risk still comes out a healthy positive +4.6% net in [Q].

Taking the TSLA analysis a step further, its time investment in prior positions [ J ] of 33 days, yields a prospective rate of gain on its [Q] of 14 basis points per day in [R]. A 20 bp/day is the equivalent of more than a CAGR of 100%; 14 is a +70% CAGR.

While this is superior performance compared to anything else in the Auto Industry investment alternatives, it is not in the top tier of the large population of parallel present forecasts. The bottom line of Figure 2 shows an average Win Odds of 90. Applied to prior forecasts net profits of +10.7% in 36 days of holding time, their average bp/day of +25.1.

TSLA Price Range expectations pictured

Figure 3

The one negative present for TSLA in this picture is its Range Index [RI], or proportion of its forecast range to the downside. Currently that is 46, which sounds like it might be mid-range, and should not be disturbing. But as the small pictured distribution of TSLA’s RIs over the past 5 years shows, the more frequent RI for TSLA tends to be more in the 20-25 area.

For a 20-25 RI to appear on TSLA, something must occur near-term to significantly raise its price range forecast, or to reduce its present price without reducing its expectations. The nature of investor reactions to the company’s prospects makes either effect possible, but not mandatory.

Conclusion

If you must have Auto investment content in your portfolio, TSLA is apparently the best choice by far. But it is not a long-term hold, and must be actively monitored as its price can be volatile, hopefully in the direction of your intent. This is a fair-weather friend, requiring frequent forecasts.

Disclaimer: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.

We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided in the SA blog of my name. First half of January has produced 73 profitable position closeouts.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.